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MLM Legality Test

Feb 8, 2008
The first version of this article was written over ten years ago, as I was starting my private practice devoted to direct selling issues. That version has been posted on many websites, including my own, and cited and referred to often. It is time for an update and to be more specific about the roles of the persons involved with a network marketing company. For the purposes of this "TEST," the only two words I will use to describe persons associated with a network marketing company are "participant" and "customer," with strict definitions.

A "customer" is an end user consumer of the products or services of the company, and in this strict definition, DOES NOT have any opportunity to MAKE MONEY with the company through any later action or conduct.

A "participant" has the opportunity to MAKE MONEY by generating business volume and has the right to introduce other "participants." Giving the participant the right to introduce other participants distinguishes a single-level income opportunity from a multi-level income opportunity.

"Sponsoring" is the act of introducing another "participant," and the word is not used to mean finding a customer.

Is there a simple, easy to apply test one can give to an income opportunity that addresses the pyramid law risk without all the pyramid law legal terminology? There is. What follows addresses that need. It is the single-level test for the multi-level income opportunity. It goes like this: Can a participant make some money SINGLE-LEVEL, that is, without introducing or sponsoring another participant? Note the specific use of the word "can," not the word "would." It is usually a given that the participant is urged to sponsor and that the income opportunity presenter will say or imply that the "real money" is in building a group. But that is usually O.K., SO LONG AS participants who choose not to sponsor at all CAN STILL MAKE MONEY.

Note also the use of the word "MAKE." It's "MAKE MONEY," not "SPEND MONEY," meaning paying income taxes if the gross income exceeds expenses associated with producing the income. Buying for personal use at distributor prices, rather than customer prices, while a savings, does not generate INCOME upon which one is required to pay taxes. Buying for personal use by itself is not an income opportunity. If the proposed income opportunity consists ONLY of buying for personal use and sponsoring more participants, with no provision for sales to customers, the design is flawed.

This simple test needs to be applied to two aspects of an income opportunity. The first aspect is the design. What do the company documents say about how one makes money? How does the compensation plan work? Not all of the fine details of every commission, bonus, or reward need to be understood; but simply, can the participant make SOME money without sponsoring? Remember, one does not MAKE money when one just buys products or services for personal use. The application of this test should in no way imply that there is anything wrong or illegal about the personal consumption of the products and services by the participant. It is just that that activity alone cannot be the sole basis for an income opportunity.

The second aspect of the application of the test is the plan implementation. Some plans are designed correctly, but are flawed in the implementation. Can a participant make money--even without sponsoring--as the plan is being taught and implemented by the prospective sponsor and others closely associated with him or her? If there is no acknowledgment or support for the non-sponsoring participant in the income opportunity, something is wrong--maybe not in the design, but surely in the implementation. Reputable and legally designed and implemented multi-level income opportunities provide a money making opportunity SINGLE LEVEL to participants who choose not to sponsor. Of course, if one sponsors others, then ADDITIONAL money making opportunities exist when those sponsored participants generate business volume.

Apply this test to multi-level income opportunities. Look at the plan design, and look at the way the plan is being implemented by the prospective sponsor and associates. If the ONLY WAY to make money is by sponsoring, STAY AWAY--the plan is fatally flawed.
About the Author
Gerald P. Nehra is an MLM-specialist, private practice attorney. He is one of only a few attorneys nationwide whose practice is devoted exclusively to direct selling and multilevel marketing issues. His 33 years of legal experience includes nine years at Amway Corporation, where he was Director of the Legal Division. He can be reached at 1710 Beach Street, Muskegon, Michigan 49441-1008, 231-755-3800, 231-755-4700 fax. His e-mail address is GNehra@mlmatty.com.
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